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Who actually buys crude oil?
danny_galaga:
I understand some basics of stock market transactions, but I'm a bit puzzled by crude oil prices. If for instance, Shell pumps oil out of a well in the North Sea, presumably they will ship it to shore and then refine it. After that, it isn't crude oil anymore, but a variety of pruducts. This somewhat different to say, gold. The market for gold is already of a refined product. Markets need a buyer and a seller, so how can there be a market for something that company is going to 'value add' to? Do they do some Enron-esque magic and sell it to themselves?
MonMotha:
Chevron, Exxon, BP, etc. are in two fairly distinct industries. They recover crude from the earth, and the refine it into refined petroleum. While they're fairly likely to keep things moving internally, they will buy or sell crude if they have excess refinery capacity or crude on hand (respectively) or if they have someone offering to either sell them crude for less than they can recover it themselves or someone offering to buy for more than they think it's worth.
It would not be unheard of for BP to sell a bunch of crude to Exxon today only to turn around and buy some back from Chevron tomorrow or even 5 minutes from now. Perhaps Exxon is offering to pay more to BP than Chevron is offering to sell to BP for (hence BP can turn a quick profit on the buy/sell and may even do a buy/resell) or Chevron has crude near a BP refinery while BP has crude near an Exxon refinery.
Also, much of the oil is refined by companies unrelated to whoever actually captures the crude. Think Saudi oil being used in the USA. The Saudis drill for and pump it, it gets shipped to the US, then it is refined in the US (into gasoline, diesel, kerosene, and other stuff) and shipped (again) to retail markets. Hence, there's quite a market for crude oil.
One might argue that is BP can recover crude, refine it, and deliver gasoline and diesel cheaper than doing the same with middle eastern originated oil, they ought to sell it cheaper. While they COULD sell it cheaper, they have absolutely no reason to do so. They are always able to sell that crude at or close to the market price, so they have no reason to value it any lower, even if their costs on it are lower.
Likewise, there is also a market for refined petroleum. This is largely how wholesale gasoline prices are determined. Retail prices are another beast entirely. The reason they tend to fluctuate a lot has to do not just with the volatility (heh) of the wholesale market but also the fact that, while gasoline is a fairly inelastic good (meaning people will tend to buy about the same amount at any price, at least in the short run), the retail gas market is extremely competitive. The demand inelasticity encourages retailers to experiment with price hikes, but the large amount of competition forces them back to whatever the market will put up with in short order.
FYI, retail margins on gasoline are often less than $50 on an entire tanker load. They make their money on the convenience store and other value adds. Generally, blaming local retailers for gas prices is counterproductive, at best. (And no, I don't work for a gas retailer or a petroleum or petrochem company).
Fordman:
The oil companies have agreed to sell what they retrieve from the earth on the 'open market'. Its not uncommon for a tanker that was pumped by BP in the gulf of Mexico to arrive at a Chevron tank/refining facility in Texas. They all basically throw the oil into one big selling block every day and all the oil companies buy it from each other, per barrel. A big difference who pumps it VS who buys it. Many companies buy it, but they dont pump it.
Its the same way with paper, coal, copper, gold, iron ore, steel (raw & rolled form), corn, wheat, beans, cattle, hogs, chickens and the likes. They're called commodities.
Fordman
t3design:
And don't forget that in the United States, around 50 cents of the price of a gallon of gas is tax. at $3.50 a gallon that is almost 17%. But it is not a percentage tax, so if you were buying gasoline at $2.00 a gallon it would be 25%.
In general, for a gallon of gas, Distribution and Marketing account for about 12% of the cost, the cost of crude oil accounts for half to 2/3rds (half at $2.00, 2/3 at $3.50), taxes run $.50 regardless and refining costs AND profits are in the $.25 to $.30 range.
Summary:
1. Crude oil prices play the major role in the cost of gas at the pump. However, due to the time lag between recovery and delivery and the other market factors, these prices do not always track exactly.
2. The government (federal and state) account for the next biggest chunk of what you pay.
3. Marketing and delivery of the product to your car is next in line, but as has already been stated, the corner gas station sees very little of that.
4. The "big" oil companies are not making huge profits as a percentage. In fact, at an average of 10% for BOTH cost and profit, the gasoline refining business is not all that lucrative. The dollar amounts result from volume and people have a tendency to forget that the millions to drill and complete the wells were invested by the company in the first place. There is considerable money being made in recovery, but it is a difficult and somewhat risky business. For every successful company out there (big or small) there are dozens that went broke trying to do the same thing.
Finally, the market for crude is a simple supply and demand market. The more oil there is available to buy, the cheaper it is. The cost of recovery does not effect the price, rather, the price dictates which recovery methods are financially sound at any point in time. IF we drilled more in North America and recovered more of the oil available (and current estimates place the reserves already discovered at levels which exceed predicted usage for the next 100 years) the SUPPLY would be greater and therefore the DEMAND being met would cause the PRICE to be as low as possible and still support the necessary means of exploration, drilling, completion and recovery.
And FYI, I don't work for the oil companies either. But I do like to drive my car to work!
Kevin Mullins:
"Supply and Demand"..... now there's a worthless excuse for an economical concept.
Realists call it "Greed" ...... the just because they can concept.
Ask yourself what is the going rate for a barrel of oil ?
Then ask yourself from where ?
So a barrel of crude oil from the middle east cost exactly the same as Canada, Mexico, Brazil ?
:dunno
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